Article excerpt

Byline: HUGO DUNCAN

THE crisis at Paragon has plunged the future of the buy-to-let marketinto doubt, and could spell the end of a great British obsession.

Mortgage lender Paragon will collapse if it fails to find [pounds sterling]280 million to repayits banks by the end of February. Like Northern Rock, it is struggling to raisemoney through its usual channels on the credit markets, which have dried up inrecent months.

Instead, Paragon has proposed a stand-by rights issue, underwritten by UBS, toraise the funds. But City analysts have poured scorn on the idea, saying itwill never get past shareholders.

Paragon shares have crashed by about 90% from a year high of 678p, making itworth just [pounds sterling]90 million.

At that price, Paragon would have to sell 350 million new shares against the114 million already in issue to raise the [pounds sterling]280 million needed. However,analysts warn that the rights issue could take place at half price, meaning asmany as 700 million new shares are issueda galling prospect for current shareholders, who are likely to vote againstsuch a move.

More likely is that Paragon is forced to go back to its banks and renegotiatethe terms of its [pounds sterling]280 million credit facility, which provides working capitalsuch as wages. Analysts believe the banks will charge interest at 5% aboveLibor or around 11.5%.

That will keep the firm afloat and in the meantime Paragon has [pounds sterling]1.4 billion offunding available in a separate "warehouse facility" for new business whichexpires in February, although given the sentiment towards Paragon and thebuy-to-let market, little new business is expected.

James Hutson of Keefe, Bruyette & Woods reckons that at this point the firmwill raise its [pounds sterling]280 million from the banks and run off its loans over the nextfive years.

During the run-off, he says, Paragon shares should be worth 232p as there is aguaranteed margin on its [pounds sterling]10 billion mortgage book to deliver a secure cashflow. …